Discussing Wealth With Your Children

How can you make sure your children and grandchildren get the right messages regarding responsible financial management?

America has one of the greatest educational systems across the globe to prepare children for the real world. But one very important thing children will not learn in school is healthy financial habits. How can you make sure your children and grandchildren get the right messages regarding responsible financial management? And how can you increase the chances that they will understand and act on them?

According to experts in educating children about family wealth, open and honest communication is essential, along with positive role modeling – starting with parents. The ways in which parents earn, save, invest, spend and donate money are critical to raising children with a healthy attitude and practices toward money.

Talking to Young Children
Figuring out when to teach your children about wealth is not an exact science, and it depends on their maturity level. You should teach your children in stages, with rudimentary conversations about money beginning with children as early as age nine. You can have simple, age-appropriate conversations about money when they are young and increase the length of the discussions and sophistication of the content as they mature. It is important for children to understand the family values around money early in their life and to develop a comfort level with talking about and managing money.

While many parents do not like to discuss family money, the subject can often be introduced simply and comfortably through a philanthropic activity. Talking with your children about how your family has enough money to meet all of its needs, and therefore desires to use some of what is leftover to do good things for the world around them, is an excellent way to introduce the concept of philanthropy. Some experts recommend encouraging young children to cut articles out of the newspaper that discuss issues they care about. Then, during family meetings (which should be held at least on a quarterly basis), children can discuss these causes and decide which are worth supporting.

When it comes to philanthropy, some families prepare children for the responsibilities of wealth by involving them in decisions about charitable contributions within the community. By becoming philanthropically active as young adults, the children learn how to make a difference in their communities while developing a social and intellectual network of their peers. Entrusting this important task to children at this time in their lives also sends a message of trust: “We think you are responsible enough to steward this wealth for our family.”

For example, setting up a donor-advised fund with a local community foundation can involve the entire family with a specific cause and the financial responsibilities that accompany it. A donor-advised fund can enable a donor to make tax-deductible, irrevocable charitable contributions to a public charity while still advising on grant-making. Children can play ongoing roles in the administration of the fund and, more importantly, in the decision-making process behind the establishment of the fund.

Parents can use different techniques depending on the age of the child. Start with a piggy bank with three slots for saving, spending and donating. As the children age, provide a continuum of experiences, including an allowance, savings accounts, budgeting, stock market games, exposure to the financial press and credit cards. The goal is to raise financially savvy and responsible children with a healthy attitude toward money.

Teens and Financial Responsibility
One smart way of tackling the issue of wealth and responsibility with teens–a more challenging audience–is to discuss how the child’s college education will be financed. Many wealthy families follow one of two philosophies: either they plan to pay for all of their children’s college expenses, or they view paying for college as a shared responsibility.

Some families pay for the cost of a public university but require a child who attends a private university to bear some or all of the financial responsibility. Others might decide to pay for all of a child’s undergraduate costs, but not graduate school. Whatever your approach, the key is to let your children know your plan early and to encourage them to begin earning and saving if you intend for them to contribute.

Some experts believe that encouraging children to make a contribution to their education can be an opportunity to transfer an appreciation for wealth and values at a deeper level. The idea is that by struggling and working for a goal, or even by experiencing some adversity, children can develop a level of responsibility that better equips them to deal with difficulties later in their lives.

Developing Financial Life Skills
It is also important to be open about how you are providing for your children in your will. When your children are in their late teens, informing them that they will be provided for should anything unexpected occur is another opportunity to set the stage for each child beginning to manage his or her own money. One approach is to provide access to trust funds on a staggered basis, with portions available at ages 30, 35 and 40.

If parents plan to transfer considerable wealth to their children, it is critically important that financial education start early and emphasize the skills required to be good stewards of the family wealth. Financial skills are not innate, and children must be prepared to manage, preserve and build the family wealth. If parents plan to give away most of their wealth to their philanthropic concerns, that decision should be communicated to the children early on. Children may have made assumptions about the wealth transfer that are not valid, and may make life decisions based on those faulty assumptions. The bottom line is that by the time the children are in their 20s, they should have a basic understanding of their inheritance. This understanding is developed over years with good communication and education that includes financial and life skills.

To help refine these skills, you may consider including your advisors in family planning sessions–for example, during part of your family meeting. It is important for your children to understand your advisors’ roles and elicit information from them to further your children’s financial education. Your advisors can also help develop skills within your family that form the foundation of solid financial values and support managing, building and preserving wealth across generations.

Including Children in Decision-Making
Estate-planning decisions should not be made in a vacuum, and there is value in including children in inheritance discussions. Increasingly, families are asking their adult children for advice on how much money they think they need, when they want it, how they want it and for what purposes.

What you do not want is for your children to be ill-prepared to steward their inheritance by managing the money irresponsibly or being unaware that the assets exist. There are many cases in which parents live very frugally and do not share information about their wealth, causing their adult children to worry needlessly about their parents’ financial well-being. In the end, open communication about money and wealth can pay enormous dividends.

Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its Private Wealth Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.